Insurance provides economic protection against losses that may be incurred due to a random event, such as death, illness, or an accident. There are several forms of insurance, such as life insurance, health insurance, disability insurance, or long-term care insurance. Under life insurance, for instance, an insurance company agrees to pay a specific amount (e.g., face value) to a designated beneficiary on the death of a specified individual (e.g., the insured) in consideration for premium payments received from the purchaser (e.g., the owner or the acquiring party) of the insurance policy.
There are many types of life insurance, but the most common types include term, ordinary, and universal life insurance. Under a term life insurance policy, the term of the policy is set for a defined period, such as one year. If the insured dies during the term of the policy, the designated beneficiary receives a death benefit generally equal to the face value of the policy. If the policy expires prior to the death of the insured, no benefit is due. The premium for life insurance policies is generally based on mortality rates and therefore increases with the age of the insured.
Unlike term insurance, a whole life insurance includes a savings component in addition to the mortality gain or loss component. A portion of the policy premiums is invested with the anticipation of producing savings. The savings are used to build cash value for the policy that can be redeemed, borrowed against, or used to purchase other investment vehicles.
Universal life insurance has the potential of providing a greater savings component than whole life insurance. Universal life affords the policyholder with the flexibility to modify the policy terms, including the premium payments and amount of coverage. As a result, the amount and frequency of premium payments may increase or decrease over the term of the policy. Being able to change the premium amount and frequency provides the policyholder with the capability of potentially increasing the associated cash value. The potential greater savings associated with universal life insurance are available for loans and other investments. However, the accumulated interest may be taxable upon surrender of the policy.
A common limitation of currently available life insurance policies is that they typically fail to conform to emerging problems or concerns for the insured. By way of example, a person may acquire a first insurance policy when they first get married. Their insurance needs can change with the growth of a family, including having or adopting children, and with other factors such as increased income and lifestyle. Classic insurance examples may be limited because the static nature of the policies can be inconsistent with the insured's fluid family status. To accommodate these changing circumstances, the heads of a family often need to reevaluate their insurance needs and to purchase additional insurance as desired. Each purchase requires the insured to figure out what type of and how much insurance is needed and to undergo a new underwriting procedure for each purchase. If the insured forgets or neglects to purchase the additional insurance, the family with expanded or changed needs may very well find itself inadequately protected if and when the insured passes away.
As such, there currently exists a need for a more flexible insurance protection product that allows families to adjust their protection to better conform to changes in the family or its needs or lifestyle.